ii view: Watches of Switzerland winds forecasts higher

Shares of this UK and US luxury watch retailer have hit an all-time high. Buy, sell or hold?

First-half results to 25 October

• Revenue down 3.4% to £414.3 million
• Pre-tax profit of £36.2 million, up from a loss of £9 million
• Net debt down 75% to £23 million

Chief executive Brian Duffy said:

"We have continued to deliver on our strategic priorities during the first half, achieving a robust performance against significant headwinds, further consolidating our position in luxury watches and demonstrating the unique, supply-driven qualities which underpin the resilience of our category and the strength of our business.

“We are confident we are well positioned for future growth, with plans to continue to invest in further cementing our market leadership in the UK and to build upon our early success generated to date in the US."

ii round-up:

Specialist retailer Watches of Switzerland (LSE:WOSG) today raised its full-year sales and profit margin estimates following a positive start to the third quarter and a better than hoped for first half. 

Despite its UK stores only trading for 44% of potential trading hours, given the second wave of lockdowns, revenues for the third quarter to date have risen by 11%. UK e-commerce sales more than doubled. Total US sales rose by just over a fifth.

Encouraged by performance to date, full-year revenue expectations have been increased to as much as £925 million from a previous £910 million. The adjusted profit margin is expected to increase by between +1.5% and 2%, up from +1.0% to 1.5% previously.

Watches of Switzerland shares rose by more than 3% in UK trading, bringing their year-to-date gain to more than 40%. Shares for luxury goods retailer Burberry (LSE:BRBY) are down by around 15% in 2020. 

The specialist watch retailer has 138 stores across the UK and US including outlets at Heathrow airport, along with five online stores. Its brands include Mappin & Webb and Goldsmiths in the UK and Mayors in the US. 

Revenues for the first half of the year, including initial pandemic disruption, fell by 3.4%, although rose in the second quarter by a fifth, helped by a reopening of its stores and strong domestic demand offsetting lower tourist and airport sales. 

The company does not currently pay a dividend. 

ii view:

Watches of Switzerland claims to be the UK's largest retailer for Rolex, Cartier, OMEGA, TAG Heuer and Breitling watches. It also offers a complementary jewellery offering. Watches account for just over four-fifths of overall sales, with jewellery the balance. For the financial year to the end of April, the UK generated just over two-thirds of group sales, the US just under a third. 

For investors, the course of the pandemic and the disruption to its store portfolio cannot be overlooked. A 200% jump in the share price since late March pandemic induced lows also injects some caution, as does the current lack of a dividend payment. But the sale of hard assets in an era of central bank money printing has some attraction, as do growing online sales and potential expansion in the US. In all, while some near-term caution looks sensible, the long-term story makes this an interesting company.

Positives: 

• Growing online sales
• Exposure to hard assets

Negatives:

• Tourist sales remain hit by Covid-19
• No dividend payment

The average rating of stock market analysts:

Strong hold